Operator
Representing VIPER today are Case Vanthoff, CEO, and Austin Gilfillan, President. During this conference call, the participants may make certain forward-looking statements relating to the company's financial condition, results of operations, plans, objectives, future performance, and businesses. We caution you that actual results could differ materially from those that are indicated in these forward-looking statements due to a variety of factors. Information Concerning these factors can be found in the company's filings with the SEC. In addition, we will make reference to certain non-GAAP measures. The reconciliations with the appropriate GAAP measures can be found in our earnings release issued yesterday afternoon. I will now turn the call over to Case. Thank you, Chip.
Welcome, everyone, and thank you for listening to Viper Energy's third quarter 2026 conference call. Q3 was another strong quarter for Viper. Oil production averaged just above the high end of our guidance range at over 69%. 9,000 barrels per day, up more than 6% quarter-over-quarter, driven by recent acquisitions and continued development from both Diamondback and our third-party operators. During the quarter, operators turned 689 gross horizontal wells to production on our acreage, including 123 Diamondback-operated wells at an average NRI of over 9%. On the acquisition front, we closed two previously announced transactions. The Riverbend acquisition on July 1st, and the drop-down from Diamondback on September 1st. Diamondback took its consideration entirely in equity for the drop-down, further increasing its stake in Viper and reinforcing our alignment with our parent company. In September, we also closed the McElroy Ranch acquisition for an aggregate purchase price of $529 million. This adds about 7,400 net royalty acres in Upton and Crane counties. This ranch gives us a concentrated ownership of roughly 12% NRI across 60,000 gross acres in what we expect to be the core fairway of emerging barnet development in the western Midland Basin. It is more than 95% undeveloped with over 40 net inventory locations, and we expect its development to support our production profile and continued growth outlook over the next decade. Additionally today, we also announced an agreement to acquire nearly 1,600 net royalty acres in the Midland Basin from Buckhorn Minerals for $280 million in cash and 1.8 million Class A shares. Approximately 80% of the Buckhorn acreage overlaps with Vipers' existing footprint, and the asset is roughly 60% undeveloped, including exposure to the highly undeveloped driver unit. We think this is one of the highest quality, sizable mineral assets left in the Midland Basin. By our estimates, nearly half of its net inventory ranks in the top quartile of remaining inventory in the Midland Basin, and 70% of the inventory ranks in the top half. Together, the McElroy Ranch and Buckhorn acquisitions add nearly 60 net locations across two largely undeveloped assets. Notably, we're funding these deals primarily with cash, delivering on the commitment we made when we revised our return of capital framework last quarter to pursue accretive M&A with less reliance on equity. Reflecting the strength of our base business in these acquisitions, we are again raising our full year 2026 oil production guidance with a new midpoint of 67,500 barrels of oil per day. We're also initiating fourth quarter oil production guidance of 70,000 to 71,000 barrels of oil per day, up nearly 1,500 barrels per day from our third quarter actuals, and inclusive of partial quarter contribution for Buckhorn. Turning to our financial results for the quarter, we generated $520 million of free cash flow, which represents a free cash flow margin of almost 80%. With the cash generated during the quarter, we declared a base dividend of $0.50 a share in addition to $90 million of repurchases during the quarter. As part of our revised capital allocation framework announced last quarter, we will also retain a significant amount of incremental cash to pay down debt from our previously discussed acquisitions very quickly. In conclusion, every part of the Viper model showed up this quarter. Organic growth, high-quality acquisitions funded primarily with cash, and a durable, growing base dividend paired with opportunistic share repurchases. With a capital-like royalty model and an unmatched acreage position in the Permian Basin, we continue to believe Viper is uniquely positioned to deliver durable per-share growth and attractive long-term stockholder returns. With that, operator, now please open the line for questions.
Operator
Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question is with Betty Zhang from Barclays. Betty, your line is now open.
Hi. Good morning. Thank you for taking my question. I first just want to ask about the M&A. It's really good to see the momentum you're seeing there while being able to fund that with cash on hand and the borrowing base. Maybe just the overall M&A landscape, why do you see these deals coming together now? Where do you see more opportunities going forward? And do you think you have the balance sheet capacity to do more of these things going forward?
Yeah, I'll give you the high level, and Austin can tell you what he's seeing in the market. I mean, I think high level, you know, two of these deals, you know, Buckhorn and Riverbend, you know, kind of packages that have been put together over the last, you know, few years that were kind of ripe for a sale. You know, we obviously were able to get Riverbend done about six months ago, and then, you know, Buckhorn, you know, through the process of the summer, you know, ended up getting it done. You know, I think both are very high-quality assets, a lot of undeveloped inventory, you know, and we think about these things as, you know, multi-decade assets that we're going to own, you know, for forever. Obviously, we still have to be focused on the accretion near-term, which both of these are, but, you know, I think that's kind of the sweet spot for Viper in our acquisition strategy. I'd say on the McElroy Ranch, you know, that's kind of one of those, you know, we call them the unicorns in this basin, right? This is a ranch that was owned by a family for, I think, 80 years or 80-plus years, one of the first ranches bought as the Permian started developing. You know, vertical wells, you know, way back in the day. And, you know, that's a hard ranch to for a lot of people to buy because, you know, they needed all cash. But we were able to move quickly and be a good counterparty. And I think, you know, the notoriety and the size and the scale of this business is what started to allow these deals to naturally accrue to us. And, you know, I kind of mentioned in past quarters calls that, you know, the opportunity set ahead of Viper looks a lot like what it did in front of Diamondback six or seven years ago with just a lot less well-funded, large, competitive peers in the peer group. And so I think that should be a win for Viper shareholders, but I think the lesson learned is that, you know, it's not all going to be equity funded. I think we have the balance sheet, the cash flow, the free cash, the free cash conversion to be able to use cash, do accretive deals for the shareholders, and be prepared to do more by paying down debt very quickly. So, Austin, what are you seeing the forward outlook here?
Yeah, I think there's still a lot to do, but I think the good thing about how we're positioned today is that we get to be opportunistic and frankly we get to be picky about the assets that we choose and the assets that we like. So if you look at everything we've done this year, River Bend, Buckhorn, McElroy Ranch, and also the drop down, you can include that in there as well. They're all kind of distinct in that they have a weighting to undeveloped acreage. So we generally can, I think, deliver differential returns by Having a unique view on asset quality and operator development. So that's all to say, while I think there's still plenty to do, we'll look for not only the near-term accretion but for a unique perspective to gain on the inventory and how that might create differential value for our shareholders.
That's great color. And for my follow-up, it just seems there's a lot of tailwind to the Viper business right now. You have higher oil prices, higher activity, and you can You have these new assets coming in where you have this visibility on development cadence going forward. Maybe can you just speak to your current view of organic growth that you could generate from the asset base today into 27 or however much visibility that you can provide to the market would be great?
Yeah, we don't have a ton of visibility on the third party yet, right? I think as we get closer to the next year, we start to look at permanent conversion and, you know, and kind of, you know, work the third party plan. You know, I think the Diamondback plan continues to chug along, you know, that these are big numbers, right? There's 123 wells with an average 9% interest is a, you know, that's a huge amount of production coming from the Diamondback drill bit that we expect to continue. You know, I think I think in general, right, I think you're right. There's tailwinds. We've generally bought assets that have outperformed the basin growth, and I think, you know, maybe that's been misunderstood, right? The amount of growth relative to the basin is a testament to, you know, Austin and the team picking assets that should outperform the basin, and I expect that trend to continue. You know, obviously, a lot of exciting things going on with new zones, the Barnett-Woodford development, you know, McElroy Ranch development, you know, some of the mega themes we talked about in the Dynaback call. You know, all those things generally accrue to the benefit of Viper shareholders and should build value over time.
Austin, you want to say anything about activity levels? No, that's right. I mean, you know, we had quite a bit of organic growth embedded in the Q3 results, and even once you strip out the contribution from the acquisitions, you're still getting some of that momentum carried into the fourth quarter. So, you know, I think we start to have a much bigger hit base, so the percentages maybe come down, but Diamondback is still driving a lot of growth through their concentrated activity on our position, and we see that happening for the foreseeable future.
Appreciate the color. Thank you.
Operator
Thank you, everybody. Our next call and question is from Neal Deeman with William and Blair. Neal, your line is open.
Hey, morning. My first question is just on asset drop-downs. Could you talk about further drop-downs for minerals and surface?
Drop-down, you know, we know about today that sit at the Diamondback level. There's always kind of little clean-ups here and there from trades that we do if NRIs are above 75%. And, you know, I think generally, you know, we're aware of where surface revenues are trading, surface cash flow is trading in the market. You know, I think we have a unique surface position at Diamondback. You know, we're evaluating the value of that within Diamondback and where it could or should sit. I think generally our progress on power deals and infrastructure development in the basin is, you know, allowing us to think about different options for the various assets we have across the portfolio. But, you know, nothing to announce today, but, you know, we're very conscious of the market and where multiples are, and I think, you know, generally, as I mentioned in the Diamondback call, we feel like we can dominate in this basin and kind of all facets of, you know, infrastructure, surface, minerals, midstream, upstream. So, you know, more to come there, Neil, but, you know, I think we're at the center of this next wave of Permian growth, and Viper and Diamondback will play an important part of it.
Perfect. Thanks, Case. And then just my second question, really just something you talked about last time on the increased flexibility that you talked about in that, I guess you called it your previous revised return on capital framework. Specifically, how do you believe this ultimately will continue to improve investor returns and the overall value? Thank you.
Yeah, I mean, here's how I would frame it. It's, you know, we're in a kind of a grow or die business, right? And if you have all of your free cash flow going out the door every quarter, you know, that limits your opportunities to grow. And so I think, you know, we recognize that there were a lot of opportunities ahead of us. You know, obviously, we knew we had McElroy Ranch in the works. We knew we had Clockhorn in the works. And we just said, let's pay a very high base dividend that's competitive with, you know, the top dividend payers across our space, you know, the majors combined with, you know, even a utility. But let's be that with growth on top. And, you know, that's allowed us to do over a billion dollars of deals with cash this year, and we'll still exit the year at, you know, sub one times leverage. So, that should accrete value to the equity holders long-term. It should allow us to grow our base dividend long-term and not, you know, be a flash in the pan because we want to be the dominant mineral position in this basin for a long time.
Operator
Thank you, Neil. Our next question is from the line of Derek Whitfield with Texas Capital. Derek, please go ahead.
Good morning again, guys. Hey, so I wanted to focus on the acquisition, the McElroy Ranch was my first question. So, regarding that acquisition, how would you guys characterize your visibility into the development of the Barnet? Clearly, Diamondback can drive activity, but how do you project it across the other operators?
Yeah, Derek, good question. So, we disclosed that in the Barnet specifically, Chevron's the largest operator, and we have the map on slide 11 of the investor presentation. So that's kind of the big chunk of the contiguous acreage on the Southwest. You know, while we don't have specific visibility into what Chevron's going to do, you know, we do know them. We do know kind of operator trends within the basin, but really where we see value in acquisitions generally and also to this deal specifically is ranking the unveiled inventory in what we think is an operator's overall inventory position. So, when you look at what Chevron's doing in the Permian, and when we look at what we think is their remaining runway, we think this is going to be some of the highest return inventory that they have, you know, both from an MPV, certainly, and then also from an IRR perspective. So, you know, we didn't underwrite it to happen today or tomorrow, but over the next decade, as these inventory locations start to get developed, I think that's going to create a lot of value for our shareholders. Great.
And for my follow-up, I wanted to pivot back to your long-term outlook for the business and what's collectively on across the Davenbeck family of companies today. Well, I realize Viper is oil and gas, realty's focus. How do you view the longer-term opportunity for surface in Midland, particularly as you think about the mega themes that you outlined in the Davenbeck shareholder letter?
Yeah, I would say generally, Derek, I have grown or we have grown more bullish on surface and kind of understand the long-term option value of it. Now, just like not all acreage is created equal on the upstream side and not all mineral acreage is created equal on the mineral side, you know, not all surface is created equal either, right? So, it's about, you know, targeted acquisitions of surface that could have real use cases for oil field development or data center development or, you know, power gen development, and there's, you know, some very specific things we're looking for when trying to pursue that. But I would say just generally, you know, our kind of attitude on pursuing the right surface acquisitions has probably grown with, you know, knowledge gained through what we hope to be, you know, one of the first real projects completed in the basin on the power set.
Kaze, if I could go one further, maybe just as a follow-up to that. If you guys are looking at that as an opportunity, would that also necessitate standing up a separate team that could really focus on non-oing gas applications, or do you think that could all be done within the current management in place?
But we certainly have a lot of talented people throughout this organization, and, you know, I think those talents can be leveraged to, you know, many different things. You know, I think it goes back to the institutional knowledge about the basin and how to get things done here that should drive that talent to succeed. So, I know you're baiting me a little bit, Derek, but, you know, I think, you know, there's some things in the works over here, and I think, you know, we have some catalysts as a group to think about, and who's going to sit where, you know, it's kind of a secondary discussion.
Appreciate the color case.
Operator
Our next question is from the line of Jack Cavanaugh with Goldman Sachs. Jack, your line is open.
Thanks, Case and team. You know, you mentioned earlier that it's a grow-or-die business, so I'm just kind of curious how that informs how you're thinking about the buyback for Venom at current levels relative to, you know, incremental equity issuance to help fund some of the inorganic growth opportunities you're seeing in the market.
A little differently, you know, I see the buyback as something that can grow per share metrics and, you know, look at, like, how many reserves per share we've grown, how much oil production per share we've grown, you know, but we've got to do that at the right time. So I think about the buyback as selective on price, and then, you know, on deals, you know, I wish we could control timing of deals, right? I'd love to buy every deal at $40 oil, but in the minerals business, at $40 oil, your check goes down, but you're not being forced to sell, whereas, you know, upstream, sometimes the CapEx requirements force people into less economic decisions. So I think being able to pounce on the upstream is more of a positioning that we focus on, whereas on the mineral side, I think balance sheet capacity, you know, to be able to divide between, you know, cash and stock and, you know, even some of the unique aspects of Viper where we can offer tax-deferred units to large enough deals, you know, positions Viper to be ready to do deals when the counterparty's ready versus be more,
I think the beauty of the business model is that we can do all of the above. I mean, when you think about a business with 80% free cash flow margins for us, it's not a decision of, you know, dividend or buyback or acquisitions or debt reduction. It's a little bit of everything. And, you know, it might change quarter to quarter on the margin. But I think we can grow the business from an absolute standpoint with good deals, with continued organic growth. And then if we can reduce the share count opportunistically where we see value, that just means incremental value creation on a per share basis.
Great. That makes a ton of sense. And then for my follow-up case, when you think about value capture across the FANG Venom complex, has the stock performance this year for Venom influenced how you're thinking about the relationship between the two companies? And looking forward, is there any change to how you see FANG supporting Venom's growth and value creation, given, you know, the number of levers you can pull with the FANG enterprise?
Yeah, I mean, that's a good question. You know, obviously very reflective this year on stock price performance relative to peers. And I guess we could debate who we should define as Venom peers. You know, I think there's probably, you know, a couple of things I reflect on through the year. I think, you know, we sold, wearing my Diamondback hat, we sold some shares in Venom in March when, you know, oil prices kind of spiked, and I think in retrospect, that probably sent the wrong message to the street, you know, and I'm not afraid to admit some mistakes, but, you know, I think selling Venom didn't make sense then. I think we've tried to reframe our commitment to Venom ownership by increasing ownership through the drop-down. I think over the long term, the FANG-Venom relationship remains very strong. I think as an overall capital allocator, keeping all of our options open at both companies is going to be a good thing for both shareholder bases. And, you know, Diamondback, that means, you know, grow my dividend, pay down debt, do deals, or repurchase shares. But also at Diamondback, it means you can repurchase Venom shares if you think they're a great deal and you're not blacked out from the market to do so. And the same goes for Venom, right? You know, Venom, we can do deals, we can buy back shares, we can hoard cash, or like we did last quarter, we used cash and deals to be able to, you know, do that quickly and get our balance sheet back in shape. So, long-winded answer of, you know, I think the relationship is strong and probably getting stronger, particularly as the, you know, three mega themes that we talked about in the last call start to come to fruition and grow within our combined complex.
Operator
Thank you, Chuck. Our last question will be from the line of Leo Mariani with Ross. Please go ahead.
Yeah, thanks. Just wanted to follow up on an earlier comment that you made. It sounds like you're very kind of committed to paying down some of the incremental debt that you guys took on with the acquisitions. Do you see perhaps the share buyback getting a little bit less capital to execute in the next handful of quarters to try to get that debt down, just trying to get a better understanding of that?
We're kind of, Leo. I mean, if the stock goes back to where it was at the beginning of the third quarter, we're going to lean in and buy back. That's the beauty of how much free cash this business is generating. And I know people like to focus on debt-to-EBITDA, but at the end of the day, the debt-to-free cash flow of Viper is second to none. So if we see weakness in the stock price, we're going to lean in and buy back shares.
Okay, appreciate that. And I guess just, obviously, FANG has had success in the Barnett. There's been a little bit more shift in activity towards that zone. It sounds like you guys are signaling you plan to kind of continue to do more in the coming years as kind of percentage of activity. Does that sort of, you know, benefit, you know, Venom a bit more on the margin? Do they have higher kind of NRIs in the Barnett, perhaps, versus some of the other more traditional zones?
Yeah, Leo, in the near term or really the medium term, I don't think it has the – really the way that you need to think about it is total Diamondback completions and then what percentage of those wells why we're willing to interest in and then what NRI we have within those. You know, we'll get the benefit of having some really high NRI and some really good areas thinking about Spanish Trail specifically. But, you know, I think for the next couple years, even with the Barnett being added in in a more significant way to the Diamondback development plan, those key metrics look similar. So that's good. I think really what gets exciting is the acquisition opportunity set that we can tailor around the Barnett. You know, Diamondback can be selective on where they're developing it as they start to HPP leases. That creates a lot of synergy opportunities or even leverage for us to be smart in targeted acquisitions. So, you know, I think that's going to be a big part of the story over the next couple of years as the Barnett becomes more relevant to both complexes' development.
Okay, and it sounds like the McElroy Ranch deal is really kind of a prime, you know, example of that, and it sounds like that's really kind of a medium to longer-term bet just on a lot more industry development in the Barnett.
Yeah, you know, I think we highlighted the Barnett there because we think it's probably the best zone, But there actually was, you know, a good amount of development from Firebird that is now continental. You know, Diamondback's got a little of it. You know, it's not aid zone territory, but there are some zones that have been tested, you know, further east that, you know, that have been productive and added to production there.
Operator
Thank you, Leo. This concludes the question and answer session. I would now like to turn it back to Kaye Svendhoff for closing remarks.
Thanks, everyone, for participating in today's call. If you have any questions, please reach out. We're available at your convenience.
Operator
Thank you for your participation today. This concludes the program. You may now disconnect.
